Panetta Predicts Deficit Sacrifices : Economy: Nominee for budget director says middle-class tax cut may have to wait as Clinton battles rising tide of red ink. Investment also tops his agenda.

President-elect Bill Clinton’s nominee to be White House budget director appeared to dash hopes for quick action on a middle-class tax cut Monday and warned Congress that the mounting federal deficit could force Clinton to ask the nation for painful sacrifices.

Rep. Leon E. Panetta (D-Carmel Valley), nominated as director of the Office of Management and Budget, signaled in his confirmation hearings that he believes deficit reduction and Clinton’s proposals for long-term government investment spending in such areas as education, job training and public works should top Clinton’s economic agenda.

Given the worsening outlook for the deficit, that would appear to leave little room in a Clinton budget for a middle-class tax cut or a short-term economic stimulus package.

Panetta told members of the Senate Governmental Affairs Committee that he believes Clinton “is committed to presenting the country with a bold economic plan . . . (which) will obviously target a credible deficit-reduction plan and will include some tough choices. It will also include a set of investments, long-term investments, that need to be made.”

In response to questioning, Panetta added that cuts in middle-class taxes should be considered only after the deficit and long-term investments are dealt with.

In a television interview Monday night on PBS, Clinton responded to new budget projections from the outgoing Administration that show the deficit ballooning. He repeated his call for cutting the deficit by $145 billion over four years--an effort all but certain to require new taxes and reductions in popular benefit programs.

“The deficit has to be dealt with because it will paralyze the ability of our country to deal with other problems--emergencies abroad and needs at home--so it has to be dealt with,” he said.

While Clinton offered no specifics about what he would cut, he did provide one clue, saying that “no President and no Congress in my judgment can deal with this deficit problem solely by raising taxes and cutting discretionary expenditures. I just don’t think you can get there.”

Notably, he did not say anything about avoiding cuts in the mandatory spending programs--from veterans benefits to Medicare and Medicaid--that are the fastest growing segment of the budget.

But while Clinton did not offer details, Panetta indicated that the President-elect and his advisers are considering much more controversial spending and tax provisions than Clinton proposed during the campaign.

For example, Panetta said, the new Administration will study deeper cuts in defense spending and popular entitlement programs, such as Social Security and Medicare. He noted that popular health care programs like Medicare, which traditionally have been exempted from spending cuts, could be targeted.

“Obviously, there are probably some areas that you can tighten up on some of the benefits provided, but you can also look at premium increases, you can look at co-payments, you can look at co-insurance areas,” Panetta said.

“As director of the Office of Management and Budget, I am going to take the approach that everything is on the table.

“I’m not going to start exempting things right now because, frankly, the problem is too great, and I think we need to look at all areas.

“We need to . . . make the tough choices and be prepared for some sacrifice . . . to make our economy more productive and provide greater opportunity for our children tomorrow.”

Panetta also stressed that Clinton has not yet decided on the shape of his economic plan and suggested that the Clinton program will not be unveiled until sometime in February.

Panetta added that Clinton’s first budget is not likely to be ready before mid-March, which will force the new Administration to ask Congress to waive a law that requires the White House to submit a federal budget by Feb. 1.

In the television interview on PBS’s “MacNeil/Lehrer NewsHour,” Clinton conceded that even achieving his goal of trimming $145 billion from the deficit might not meet the pledge he made in his campaign to cut the deficit in half by 1996, noting that deficit projections have worsened since he made the promise.

Although Clinton offered no specifics about how he would accomplish his goal, his remarks appeared to be part of a campaign by the President-elect to prepare the nation for unpopular deficit-cutting moves that he may propose in the next few weeks.

Clinton met late last week in Little Rock, Ark., with his top economic advisers to discuss his economic plan. The Monday interview featured Clinton’s first public comments on the deficit since that meeting and may provide some clues to those discussions.

Clinton reiterated his support for the investment sections of his program, which includes such items as his national service program for college tuition, money for Head Start and child nutrition programs and support for high-technology expenditures, such as high-speed rail and fiber-optic communications.

“I have to pursue that investment program, because that’s the only way we’re going to grow the economy,” he said.

To pay for it, “we’re going to have to cut more in other places than we would have thought otherwise, because the deficit has gotten bigger,” he said.

During the presidential campaign, Clinton argued that the federal tax system had placed an unfair burden on the middle class and pledged to raise taxes on the wealthy while cutting taxes for the broad middle by a total of $60 billion over four years.

But he did not say how such a cut would be structured.

Since the election, however, Clinton and his advisers have put greater emphasis on deficit reduction than they did during the campaign and gradually have sought to play down public expectations about both income-tax cuts and a stimulus program.

New and more pessimistic budget projections from the Bush Administration, showing that the deficit will be as high as $305 billion by 1997, have been used by Clinton transition aides to underscore the point that deficit reduction is more urgent than anticipated.

Over the weekend, several Democratic congressional leaders said that cutting taxes for middle-America might have to wait while Clinton addresses more pressing economic concerns. House Speaker Thomas S. Foley (D-Wash.) suggested Sunday that quick action on a tax reduction should be rethought.

Senate Majority Leader George J. Mitchell (D-Me.) said that he “would still like to see the tax code made more fair. If we can do it this year, fine. If we can’t, and because of the deficit, which is a serious consideration, then at the earliest opportunity in the future.”